When you start a one-person limited company, even though you think you are ‘going it alone’ and may be the sole owner and proprietor of the business, it is not the same as being self-employed. The two are often confused and that can lead to you making expensive tax and accountancy mistakes during the early days of your business.

There are fundamental distinctions between being the director and shareholder of your own limited company and being a self-employed sole trader. As a director, you are an officer of the company, or a post-holder, and for income tax and National Insurance purposes you are treated as an employee. The vast majority of IT contractors are employees of their own limited company. So, you are not self-employed.If you are trading as sole trader, without an intermediary such as a company or partnership between your clients and you personally, then you are almost certainly self-employed. I say almost certainly because it is possible to be an employee of a sole tradership – many workers are – but it is not possible for your one-person sole tradership to employ you.

What’s the difference? Well, the key one is that different tax and National Insurance and expenses rules apply. Plus your business is a separate legal entity if you are trading via a limited company, whereas a self-employed sole trader is personally liable for their business’s financial and other undertakings.

This is a distinction that many high street accountants who are not contractor specialists fail to appreciate. Their limited company IT contractors are not self-employed even though they are a running a one-person business, and the high street accountant may push them towards using the wrong set of self-employed rules.The decision to run your one-person IT contracting business via a sole tradership or limited company depends on your personal circumstances. However, you may find that the decision is made for you because few agencies and clients providing you with contract work will engage with you as a sole trader. That’s because they are afraid of the risk that you might try to claim employment rights. Agencies and clients prefer an intermediary, such as a limited company, which employs you already, so you can’t claim any rights from your client.

Plus, if you are earning more than around £30,000 a year, the tax benefits of withdrawing most of your income as dividends start to outweigh the administration costs of running a limited company. As you earn more, the tax benefits can become substantial and you can also choose to structure your affairs and payments to maximise these benefits.So, when you start your IT contracting limited company, make sure you use the correct set of tax and expenses rules from the start. It could save you considerable sums in back taxes, interest and penalties.

There are fundamental distinctions between being the director and shareholder of your own limited company and being a self-employed sole trader. As a director, you are an officer of the company, or a post-holder, and for income tax and National Insurance purposes you are treated as an employee. The vast majority of IT contractors are employees of their own limited company. So, you are not self-employed.If you are trading as sole trader, without an intermediary such as a company or partnership between your clients and you personally, then you are almost certainly self-employed. I say almost certainly because it is possible to be an employee of a sole tradership – many workers are – but it is not possible for your one-person sole tradership to employ you.What’s the difference? Well, the key one is that different tax and National Insurance and expenses rules apply. Plus your business is a separate legal entity if you are trading via a limited company, whereas a self-employed sole trader is personally liable for their business’s financial and other undertakings.

This is a distinction that many high street accountants who are not contractor specialists fail to appreciate. Their limited company IT contractors are not self-employed even though they are a running a one-person business, and the high street accountant may push them towards using the wrong set of self-employed rules. The decision to run your one-person IT contracting business via a sole tradership or limited company depends on your personal circumstances. However, you may find that the decision is made for you because few agencies and clients providing you with contract work will engage with you as a sole trader. That’s because they are afraid of the risk that you might try to claim employment rights. Agencies and clients prefer an intermediary, such as a limited company, which employs you already, so you can’t claim any rights from your client.

Plus, if you are earning more than around £30,000 a year, the tax benefits of withdrawing most of your income as dividends start to outweigh the administration costs of running a limited company. As you earn more, the tax benefits can become substantial and you can also choose to structure your affairs and payments to maximise these benefits.

So, when you start your IT contracting limited company, make sure you use the correct set of tax and expenses rules from the start. It could save you considerable sums in back taxes, interest and penalties.